With ISA season approaching you may be asking yourself: “What ISA is best for me?” The answer most people come up with is a cash ISA.
Last year 72% of the 10.8 million ISAs purchased were cash ISAs. Stocks and shares ISAs made up most of the rest. Since ISAs were launched in 1999 cash ISAs have been the most popular in every year but two.
A cash ISA is a wrapper (a place to put your savings) that lets each person earn interest on up to £20,000 of savings without paying tax. A stocks and shares ISA does the same for money invested into shares and other financial investments.
For many people, a cash ISA makes sense because cash can be the lowest-risk way to save in the short-term. £1,000 of cash is always £1,000. If you might need to use the money in the short term cash is probably for you.
But if you are saving over a longer period you may want to consider the alternatives. In the current inflationary environment we are in as prices rise, that money buys less each year. For example, goods that cost £1,000 today might cost around £1,240 a decade later. Many savings accounts can't keep up with rising prices because of low interest rates.
This might not be too painful for a year or so, but in the long run your money is likely to be worth considerably less as prices rise faster than the interest on your savings. The longer you leave your money in cash, the less you will potentially be able to buy with it.
You could also be missing out on the chance to grow your savings if you are able to take a longer view. Over five years or more, investing in a mix company shares, bonds are other assets – has usually made savers more money than cash.
Investing in a stocks and shares ISA can require more nerve. Unlike cash, share values go up and down. Faced with headlines about stock market meltdowns it’s easy to see why most people opt for the familiarity of cash.
But if you’ve got money you can set aside for a few years and you can handle some ups and downs, looking beyond cash can make your money work harder.